Brentwood, CA · Member since 2020 · 20 posts · 15 votes
I recently purchased my first home for myself and my family to move into. I thought it was a good start because I could gain equity and use it to my advantage later. I also got tired of paying someone else to live in their house and saw this as a forced savings account. A coworker of mine is saving his money up to buy a rental first to start his passive income dream. Is one way better than the other? Are they equally beneficial? Or does it just depend on your situation?
For added context if it helps, I live in the CA, San Francisco Bay Area.
My first purchase in the Bay Area will be a 3 or 4 unit building that I can house-hack (live in 1 unit and rent out the others). I, as well as most of BP, view this as the best of both worlds; Building your own equity while also starting out with investment management.
I've always been a strong supporter of buying a multi-unit and living in one of those units. Best way to get started in your investment career in my personal oppinion.
Like everyone is saying there are a lot of variables to consider. Plus a good deal is a good deal, so maybe you end up finding a good deal on a rental property first, or vice versa.
That being said, there are gigantic benefits to owning your primary residence. Including smaller down payment and better loan terms. Plus, you can make improvements while living in it.
Probably 90% of the time in most places in the country it's best to buy your primary residence first.
@John Brooks house hack is the best option because you get primary residence and a rental in one. If you are deciding between purchasing a rental and primary residence, keep in my the numerous hugely beneficial financial incentives the government (and banks and insurers) provide for primary residence ownership: 1. You get more favorable mortgage interest rates on primary residences compared to non-owner occupied investment properties. Banks view buyers as less likely to walk away from primary then investments if the market tanks so they charge less of a risk premium on the interest rates.
2. Primary residence down payments can be super low compared to investment properties! You can get a primary residence mortgage 0-3% down is common (you will pay PMI), but this saves a ton of cash upfront, that you could invest or let's you buy a primary when you couldn't buy the same priced rental. Investment property mortgages typically require 25% down when not owner occupied. That's a big difference.
3. You pay zero taxes on your profits when you sell if you live there for at least 2 years (up to 500k in profit if married or 250k of single). I bought a primary residence in Brooklyn NY in 2012 for $750k and resold it less than four years later for $1.2M and didn’t pay a cent in taxes on the 450k gain (minus closing costs). There is a similar benefit to a 1031 exchange for investments but there is talk of getting rid of this in the future and the primary residence tax deduction seems less likely to be eliminated since there are more primary homeowners that are voters compared to rental property owners.
4. You can deduct all of the mortgage interest you pay from your job income. So if you make 100k in salary and spend 20k in interest on your mortgage annually, you only pay taxes on 80k of your salary. Mortgage interest on an investment property is deductible only against investment income, not ordinary income, meaning you’d have to pay taxes on your full 100k of salary income.
5. You need a place to live so if you buy a rental, you need to still pay to live somewhere. I have an interest only mortgage on my primary and it costs me a lot monthly (including insurance maintenance etc) than I’d pay to to rent the same place.
6. My property insurance rate is significantly lower on my primary residence compared to my investment properties.
7. In some places, you can’t rent in the same neighborhoods where you buy a house. Some neighborhoods pride themselves on being owner-only (heaven forbid lowly renters live nearby) so if you want to live there, that’s the only option.
@John Brooks I love the idea of house hacking. I never did it, but I love the idea of buying a 3-4 family...living in 1 unit and having the other units pay all the bills. There’s a million ways to do it. I did it a different way, but I think this way is smart.
I bought rentals first but wish I had bought something to live in first, now that I've done that; too. There are so many low and no down payment options; so even if a house hack isn't available I don't see huge upsides in living in a rental... unless a person is at the point of financial freedom. Or, if they just prefer it. Few of these things in REI are wrong, few things are right. Most are preferences and opinions.
I did the same, house then investments. It makes more financial sense to buy investments first as you will be in the game sooner and hopefully house hacking to pay your own living expenses. But you can always rent your current primary residence after a year and go to something else. So there are still options even after you buy primary residence first.
@John Brooks I would say yourself first but I guess it depends. However if you do buy for yourself first, buy smart either with potential equity (ie flip, up and coming neighborhood) or one you can use as a house hack.
@Shiva Bhaskar - I understand where you are coming from on the house as an investment theme, but I have to somewhat disagree. The bottom line is that you have to live somewhere, so you can either pay rent or a mortgage. An owner occupied home will not cash flow in the traditional sense, but it sure does when you consider that you will be paying x per month either way. With owning you will at least get the principal pay down, 30 year fixed payment (as opposed to rent increases), tax advantages, and appreciation that comes with owning. I guarantee you that you will be your own best tenant!
The issue with a home as an investment motto is when people use this an excuse to overbuy or purchase a home that they otherwise shouldn't..... Its the typical "Hey we qualified for $350k so lets go start looking for $400k homes (insert any price range)... its in investment after all!" The other issue is when people buy knowing that their living situation is going to change and they will need to sell it is a relative short time frame.
My current primary was an excellent investment. In 2017 I purchased a property that needed rehab and turned it into EXACTLY what I wanted (kitchens, baths, flooring, EVERYTHING). I bought a good enough deal where I could have sold it for 25% more than what I had into it at the time. That spread has grown significantly since. Not that I plan on moving, but that profit is now tax free (2 years on primary). I would call that a pretty good investment! BTW... I did the same with my primary before that as well. It took discipline waiting for the right deals to come along.
William I do partially agree. I think that you can take a fixer upper, improve it, live very well, and move on.
However, MOST people these days, as we know, don't do it that way. They overpay for a fixed up property, or fall in love with a house, and pay too much. I do agree re the tax advantages, though of course depreciation on rentals have great tax benefits too. I guess my biggest issue is that I live in California, and have lived elsewhere, and seen owner occupants overpay for so many properties. The approach you took with improving the property is a wise one, and it sounds like a great home to live in!
@Lane Kawaoka makes an excellent point - look at the price to rent ratio for your area in your analysis
@John Brooks I agree that it is especially important in the early stages of investing to be careful to not make any foreseeable major mistakes, because you are building a foundation. When you have a lot of properties, you can bounce back from a risk more easily. But don’t get too worried about it – you can do well with either strategy. But if in doubt, why not get the benefits of better financing terms that are available for your primary residence? You can always move later. If you can afford to buy a multifamily you could have the benefits of both.
I am saving for a rental property first. I get the whole equity discussion, "paying someone else's mortgage" down and blah blah blah. There are great reasons to buy a home.
But the home is not going to bring me cash flow ever. At the end of the month I'm not counting my equity, I'm counting my income. My income is what gives me financial peace of mind month to month and the higher that is the more I can save and faster.
IMO The multi family is a faster, higher leveraged tool than the typical single family home.
@Brian Gerlach man, you and me both. I look back to when I was just out of high school back in MN. I totally would have house hacked the heck out those years. Ah man. You live and learn, I just need to apply now, what my 40 year old self would want me to apply.
@John Brooks it just depends on your situation. Having a family I can see and understand why you chose to buy your house first. I myself would do the same. But if I were single and knew what I know now I would totally buy my rental first and THEN later on down the road I’d buy my house. But to be specific if I were single I would probably start with buying a multi-unit complex (duplex or higher), live in one unit and rent out the rest so that I will technically be living mortgage free.
I would listen to your wife if she is wise with money, because if you don’t you may spend too much on your mortgage and never have enough save to buy your first rental. . I am lucky to have such a wife and that is why we have wealth. 
@George Allen I’ve been encouraging all of our kids to consider a house hack for their first RE investment. I’m hoping the next generation is an improvement on this one, ie a little bit wiser than I was, ok a lot wiser!
Do all of the analysis you want, the simple fact remains that "In the Federal Reserve’s most recent Survey of Consumer Finances (in 2016), a blockbuster statistic was revealed. The median net worth of homeowners was $231,400. Renters had a net worth of just $5,000."
I am saving for a rental property first. I get the whole equity discussion, "paying someone else's mortgage" down and blah blah blah. There are great reasons to buy a home.
But the home is not going to bring me cash flow ever. At the end of the month I'm not counting my equity, I'm counting my income. My income is what gives me financial peace of mind month to month and the higher that is the more I can save and faster.
IMO The multi family is a faster, higher leveraged tool than the typical single family home.
I agree with you that the multi family is a faster, higher leveraged tool than the typical single family home, but I disagree with buying rental properties first as a sound strategy. Not looking at the "paying someone else's mortgage" argument or the growing equity for when you're an old man argument, I don't really care about that either. I'm looking at it purely from a financing point of view.
There are numerous first time home buyer programs and down payment assistance programs out there for owner occupied properties with fantastic loan to value propositions and low low low rates. Your first home should be one of those so you can get what you want faster; income; whether it's from the tax advantage of writing off mortgage interest or from higher higher cash flow because you're paying less in interest. The opportunity to be a first time homebuyer is limited (of course). Take advantage of the situation and leverage it to your advantage.